Is Weigang Environmental Technology Holding Group (HKG:1845) Using Debt Sensibly?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Weigang Environmental Technology Holding Group Limited (HKG:1845) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Weigang Environmental Technology Holding Group

How Much Debt Does Weigang Environmental Technology Holding Group Carry?

The chart below, which you can click on for greater detail, shows that Weigang Environmental Technology Holding Group had CN¥53.7m in debt in December 2021; about the same as the year before. However, it does have CN¥79.2m in cash offsetting this, leading to net cash of CN¥25.5m.

How Healthy Is Weigang Environmental Technology Holding Group's Balance Sheet?

According to the last reported balance sheet, Weigang Environmental Technology Holding Group had liabilities of CN¥290.5m due within 12 months, and liabilities of CN¥2.94m due beyond 12 months. Offsetting these obligations, it had cash of CN¥79.2m as well as receivables valued at CN¥488.0m due within 12 months. So it can boast CN¥273.7m more liquid assets than total liabilities.

This luscious liquidity implies that Weigang Environmental Technology Holding Group's balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Weigang Environmental Technology Holding Group boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Weigang Environmental Technology Holding Group will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Weigang Environmental Technology Holding Group wasn't profitable at an EBIT level, but managed to grow its revenue by 4.6%, to CN¥562m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Weigang Environmental Technology Holding Group?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Weigang Environmental Technology Holding Group had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CN¥25m and booked a CN¥12m accounting loss. With only CN¥25.5m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Weigang Environmental Technology Holding Group (1 is a bit unpleasant!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.